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Apple's Net Income Slides 7%,
But Sales for iMac Are Robust

Apple Computer Inc.,
bolstered by strong sales of its new flat-screen iMac computer, posted a 4% jump in fiscal second-quarter revenue even as net income declined 7% from the year-earlier period.

In a more positive sign, the Cupertino, Calif., computer maker predicted that revenue in its current quarter will hit $1.6 billion, up from the second quarter and above most analysts' estimates. Apple said profit for its fiscal third quarter, which ends June 30, would remain flat or rise "slightly" from its fiscal second period, a forecast slightly below what many analysts had been expecting.

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For its fiscal second period, which ended March 30, Apple reported net income of $40 million, or 11 cents a share, compared with $43 million, or 12 cents a share, in the year-earlier period. Revenue in the most-recent period was $1.5 billion, matching the forecast Apple made three months ago, compared with $1.43 billion in the year-earlier period.

"It was a very solid quarter," said David Bailey, an analyst with Gerard Klauer Mattison, a New York securities firm. Apple said it shipped 220,000 flat-screen iMacs in the period -- "a very strong number," he said, "especially given some of the unfounded concerns out there about production problems."

In January, Apple said it might have problems meeting iMac demand in its second quarter because of component shortages. Apple reiterated Wednesday in an analyst conference call that it has amassed a "significant backlog" of orders.

But Apple Chief Financial Officer Fred Anderson said the company now expects production to catch up with demand in the current quarter. He said that should aid gross profit margins in the fall by relieving Apple of previous pricing commitments to customers and allowing the company to pass along price rises.

"As soon as they're out of backlog they get higher prices. It might be a matter of a few weeks," said Charlie Wolf, an analyst with Needham & Co.

In addition, Mr. Anderson said Apple's gross profitability should improve later in the year, as certain component costs stabilize -- notably flat computer screens and memory chips -- and the company ships more iMacs from Asia via steamship rather than air freight, which it is using to ship more than half of all iMacs now. In the meantime, he said gross margins would continue to be affected by those costs in the current quarter, causing the flat to "slightly up" earnings forecast for its June quarter.

In its second quarter, Apple said it shipped 813,000 Macintosh computers, up 8% from the year-earlier period. Analysts warn, however, that Apple isn't a good bellwether for the personal computer industry as a whole, as its sales often don't track sales of Windows-based machines.

Apple said it expects to open 20 more of its own retail stores this year. In its second quarter, Apple said it garnered $70 million in revenue from 27 Apple stores, posting a loss from those retail operations of $4 million, narrower than the loss of $8 million in its previous quarter.

But the flat-screen iMac's sales were what made the quarter, Apple executives said.

"This is certainly our best product launch since the original iMac," said Mr. Anderson in an interview. "It's enabling us to reach out beyond our traditional installed base of Mac users to new customers and Wintel switchers," he said, referring to people who use computers based on
Microsoft Corp.'s
Windows operating system and
Intel Corp.'s
microprocessors.

Apple's results were released after markets closed. Its shares fell slightly in after-hours trading to $25.88, after settling at $26.11, up 37 cents, in 4 p.m. Nasdaq Stock Market trading.